FOCUS: UNCONVENTIONAL OIL & GAS — Argentine renationalization of YPF could hinder shale development

May 7, 2012
Development of the massive shale discovery recently made by Repsol SA in Argentina is threatened by the Argentine government's pending renationalization of YPF SA.

Development of the massive shale discovery recently made by Repsol SA in Argentina is threatened by the Argentine government's pending renationalization of YPF SA. Argentine shale could transform oil and natural gas production similar to how unconventional plays boosted US production, said Repsol YPF SA spokesman Kristian Rix.

But political uncertainty could spoil expectations for the Vaca Muerta shale formation. The Argentina Senate voted Apr. 26 in approval of Argentina President Cristina Fernandez de Kirchner's bill to expropriate YPF, and a vote in the Lower House of Congress was imminent as this article went to press last week.

Repsol YPF planned to drill 20 wells in Vaca Muerta in Argentina's Neuquen basin during 2012 before a Fernandez Kirchner unveiled plans in April to renationalize YPF.

The government intends to seize 51% interest of YPF, and all that stock belongs to Repsol, which owned 57% of YPF before Kirchner outlined her plans. The government abruptly took over temporary management of YPF under an emergency decree.

Repsol has said it reserves the "right to take legal action against any investor in YPF or its assets following the unlawful expropriation of that company."

During recent phone and e-mail conversations with Oil & Gas Journal from his Madrid office, Rix said, "We are very proud of our success in identifying these resources and saddened that the current government appears intent on unlawfully confiscating the YPF we created."

Government officials accuse Repsol of having underinvested in YPF since acquiring it in a 1999 privatization just before Argentina's currency collapsed in 2001-02. Repsol suggests Argentina's subsidies, price caps, and export taxes depressed production since 2003 when President Nestor Kirchner took office. His wife, Cristina, took over as president in 2007. Nestor Kirchner died in 2010.

During 2011, Argentina's production averaged 551,000 b/d of oil and 3.3 bcfd of gas (OGJ, Feb. 13, 2012, p. 31).

The European Union has warned Argentina that its plans to renationalize YPF could jeopardize trade ties. EU officials have warned Argentina of possible retaliation through a series of import restrictions.

"I wish to express the EU's serious concerns about the overall business and investment climate in Argentina," Dow Jones Newswires quoted EU Trade Commissioner Karel de Gucht as writing in an Apr. 19 letter to Hector Timerman, Argentina's foreign and trade minister.

Repsol YPF SA estimates its Vaca Muerta oil and gas shale formation contains more than 21 billion boe. But the pace of shale development is being questioned because of the government's efforts to renationalize YPF. Photo from Repsol YPF.

"This situation is now at a point where it risks jeopardizing our overall trade and investment relations," de Gucht said.

Spanish Foreign Minister Jose Manuel Garcia-Margallo has called upon the World Bank, International Monetary Fund, and World Trade Organization to impose measures encouraging Argentina "to return [to] the path of international rule of law."

Ryder Scott estimates

Vaca Muerta, at 3,000 ft deep, is three times as thick as the South Texas Eagle Ford. The US Energy Information Administration has ranked Argentina third worldwide in estimated technically recoverable shale gas resources of 774 tcf, and as drilling progressed, the formation has proved to be oil- prone.

Repsol YPF said it analyzed unconventional technologies used in the US and adapted them to Argentina's geology, and the company said its technical teams have spent $300 million on exploration, mapping, and initial development in the Vaca Muerta formation, which produced 700,000 boe during 2009-11.

If exploration proves successful and intensive development efforts were undertaken immediately, Repsol suggests Vaca Muerta could double Argentina's production in 10 years although that would require an estimated investment of $25 billion/year for 10 years.

"A program of such magnitude would require an important capital investment in Argentina from international markets," a Feb. 8 Repsol release said.

By Jan. 31, YPF had drilled 28 new wells and recompleted 1 well in the Loma La Lata and Loma Campana blocks, advancing its Vaca Muerta development plan. Of the 28 wells, 24 were vertical wells completed with stimulation treatments of 2-4 hydraulic fracturing stages, Rix said.

Currently, 20 of those wells produce crude oil from natural flows with initial rates of 180-600 boe/d. The initial rates were restricted to a 4-mm bore.

Six of the wells produced without need for stimulation, Rix said. Four horizontal wells were drilled in late-2011, and evaluation remained pending.

"It is in any case important to highlight that this opportunity is the first of an array of existing niches for [un]conventional resources in Argentina that are being explored by YPF and other companies, which might in future years expand the growth scenario for the production of reserves and hydrocarbon resources in Argentina," Rix said.

"The government's move to expropriate threatens long-term energy security for the sake of short-term political gain, and that is probably a bad thing for Argentina," Rix said.

Baker Hughes Inc., in its monthly international rig count, reported 65 drilling rigs working in Argentina during March. Repsol YPF estimates at least another 60 drilling rigs would be needed in coming years to drill 2,000 producing wells.

Apache Corp., ExxonMobil Corp., EOG Resources Inc., and others are among the companies exploring Vaca Muerta.

Repsol YPF hired Ryder Scott Co. LP, Houston, to audit its reserves, contingent resources, and prospective resources of unconventional oil and gas in Vaca Muerta.

The formation is estimated to cover 7.4 million acres of which Repsol YPF has a net 3 million acres. Preliminary results indicated 77% of the area contains oil with the rest containing dry and wet gas, Repsol said.

Ryder Scott evaluated a total area of nearly 2 million acres of which Repsol YPF hold a net interest of 1.2 million acres. Auditors estimated the resource potential at 116 million boe proved, probable, and possible reserves, 1.525 billion boe of contingent resources, and 21.167 billion boe of prospective resources.

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About the Author

Paula Dittrick | Senior Staff Writer

Paula Dittrick has covered oil and gas from Houston for more than 20 years. Starting in May 2007, she developed a health, safety, and environment beat for Oil & Gas Journal. Dittrick is familiar with the industry’s financial aspects. She also monitors issues associated with carbon sequestration and renewable energy.

Dittrick joined OGJ in February 2001. Previously, she worked for Dow Jones and United Press International. She began writing about oil and gas as UPI’s West Texas bureau chief during the 1980s. She earned a Bachelor’s of Science degree in journalism from the University of Nebraska in 1974.